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It’s all down to Africa

May 28, 2010 - 9:00am -- Nick Young

An abridged version of this review essay, also discussing Paul Collier’s new book The Plundered Planet, appears on the Nation Media Group (Kenya)’s Africa Review website.

‘The Dragon’s Gift: The Real Story of China in Africa’
by Deborah Brautigam, OUP (2009), 397 pp

Part of the Western world’s emotional response to China’s ‘rise’ has been a general alarm lest the Yellow Peril swarm across Africa in search of loot. It is as if there were a kind of Monroe Doctrine etched upon Western European and American hearts and minds: Africa is the proper sphere of influence of the white-majority Powers, ours alone to lecture, structurally adjust and bless with charity. No sooner does a Chinaman appear upon the savannah (actually, they’ve been around for decades, but few Westerners noticed them before) than we conclude that his ‘insatiable appetite for resources’ has brought him to strip-mine the continent, encouraging dictatorship, rampant corruption and exploitation along the way. Despite its unpromising title—how much longer must we endure Dragon, Tiger and Great Wall clichés?—Deborah Brautigam’s book is a useful antidote to such hysteria, correcting not just inherent bias but gross factual errors circulated by a string of prestigious media houses, international financial institutions, private think tanks and NGOs.

Brautigam began to study China’s aid program to Africa back in the 1980s, shortly after the Tan-Zam railway heyday of Maoist south-south solidarity (which also aimed to secure diplomatic recognition for Beijing and isolation of Taiwan). She is thus well placed to sketch the evolution of Chinese engagement from ‘red’ to ‘expert’ and from ‘aid’ to a distinctly businesslike emphasis on trade and investment that, Beijing repeatedly insists, is ‘win-win.’ One of her central insights is that this transition was driven not just by the dawning of economic pragmatism in China’s ‘reform and opening’ era but by what China learned—as an aid recipient, trading and investment partner—from the West and, more especially, from Japan.

How Japan made ‘China in Africa’

A formative step in the making of what was later to become China’s ‘going global’ strategy, Brautigam suggests, was a USD 10 billion deal struck with Japan in 1978. Japanese credits to that value enabled China to buy in Japanese technology for upgrading production in mines and oilfields that Mao Zedong had previously struggled to exploit with heroic, proletarian labour but precious little else. The credits would be repaid with oil and coal exports to Japan, which had already pioneered similar deals with India. This effectively amounted to an ‘investment + technology for resources’ swap of a similar kind to that which China now offers African states.

Western governments were quick to step through China’s opening doors with financing deals to encourage the uptake of their own technologies (sold by, delivered through, and gaining market access and knowledge for their own corporations). Not all of this commercial activity was officially counted as ‘aid’ but Official Development Assistance budgets did provide the concessionality, or ‘softness,’ of many mixed credit lines. (As late as 1996 a Counselor for Development Cooperation with the European Union mission to Beijing told me it was hard for him to establish what EU member states were up to as donors to China because they were generally coy in the fierce competition for infrastructure deals, notably in sewage and water treatment plants. So much for Western transparency.) The overall picture was that:

Japan and the West could use their modern technologies to exploit natural resources that Chinese technology could not yet unlock. China could pay for this investment later, with the resources that were uncovered. The subsidies and aid used by the West and Japan to wrap their naked hunger for China’s markets meant that China was getting a discount on finance the country needed for its modernization. (p. 51)

The present decade’s high-profile, multi-billion dollar loans from China’s Eximbank to resource-rich but cash-strapped African states (notably Angola, Nigeria and DRC) follow much the same pattern. The money does not go through African governments. Rather, Eximbank gives the cash to Chinese companies for contracts to build agreed extractive, energy, transport and communications infrastructure. The companies, in which Chinese government entities generally hold a major stake but which are now run on highly competitive lines, usually have to tender for these projects—a process which, Brautigam claims, China learned from the World Bank—and they only receive final payment when the recipient government has signed off on satisfactory completion. The loan is ultimately repaid by the creditor countries from dedicated accounts that accrue commodity export earnings. These arrangements ensure, Brautigam argues, that at least part of the borrowers’ resource wealth is devoted to growth-promoting infrastructure, rather than merely being ‘eaten’ by elites.

Loads of money

The major Eximbank resource-backed infrastructure loans, Brautigam is at pains to emphasise, do not count as ‘aid’ according to the criteria of the OECD’s Development Assistance Committee, nor do they figure as such in China’s own national accounting. (In fact, Eximbank raises the capital it needs not from government budgets but by issuing its own bonds in domestic markets that are buoyed by China’s famously high savings rate: it is not Chinese taxes but a portion of Chinese household savings that are lent to Africa for Chinese firms to build roads, mineshafts, ports and railways.) For the big deals, the credit is certainly cheap, but it is commercial, charging interest rates that are one per cent or more above the London Inter-Bank Offered Rate and yet that typically undercut the major private banks. Does this cheap credit, firmly tied to the purchase of Chinese services and equipment, amount to ‘unfair’ competition and export promotion? Brautigan is inclined to accept that it does, whilst arguing that China is gradually moving into line with OECD (voluntary) codes on export promotion. Yet it is hard to see why China, which has not been invited to join the 31-nation OECD club, should feel bound by that club’s recommendations.

The big credit deals have unsettled Western donors, the World Bank and the IMF, who were pressing for economic and ‘governance’ reforms, anti-corruption measures and greater transparency in return for official aid financing. Yet, as Brautigam makes clear in the case of Angola, the recipient of a major Chinese Eximbank loan in 2005, the Angolan government had long been relying on private finance, securing huge (and more expensive) oil-backed loans from the likes of Standard Chartered, the Royal Bank of Scotland, Banque National de Paris, and Comerzbank: “it was Western banks that gave loans without requiring transparency, and Western companies that exported Angola’s oil, providing cash flows for the ruling party.” (276, emphasis in original) Enter the dragon (whoops, sorry) and Angolans get to see Chinese finance going into postwar infrastructure reconstruction programmes, as opposed to MPLA pockets. Who, apart from Western bankers, could complain about that?

If the profit margins on the big deals are wafer-thin for China’s Eximbank, it does also extend smaller loans across the continent at even more preferential, below-market rates. These loans are counted as ‘aid’ (as was the Western donor practice in China and elsewhere.) Some have been used to revive ‘turnkey’ projects in agro-processing or light industry (such as sugar, sesame, textile, pharmaceutical and cement factories) that were supplied in an earlier era of Chinese aid but that failed to thrive under local management after delivery. (Generally, rehabilitation of these projects involves bringing them under commercial management of Chinese firms on a lease basis, or creation of joint-venture enterprises, which the Chinese Ministry of Commerce also supports with an aid fund.) Other concessional loans can result from a Chinese company approaching an African government with a proposed project which that government then requests Eximbank to finance cheaply, contracting the Chinese company to implement (without competitive bidding). If this seems like flagrant promotion of Chinese corporate interests it is worth pointing out that this loan ‘request’modus operandi was, again, developed by Japan in China. Moreover, in Brautigam’s assessment, Eximbank, together with the Chinese Ministry of Finance, which approves and subsidises the loans, are increasingly scrupulous about the commercial viability of proposed projects: Africa is not sold no-hopers. (Incidentally, Brautigan also goes a long way towards scotching the myth that Chinese contractors employ only Chinese workers on construction projects or in Chinese-invested factories. Even the Tan-Zam railway, “employed 16,000 Chinese laborers at its peak (but many tens of thousands of Africans.)” [154] In Sudan, 93 per cent of workers in China’s oil operations are Sudanese; the longer a Chinese contractor stays in Africa, the higher the proportion of local workers they tend to employ. [155] In Chinese-invested factories, research has shown that 80 to 90 per cent of workers are local. [229])

Altogether, Brautigam estimates Chinese aid to Africa in 2009 as amounting to USD 2.5 billion, placing China as a bilateral donor somewhat behind or on a rough par with the UK, France, Germany and Japan, but still well behind the United States (more than 7 billion in 2007), the World Bank (6.9 billion in 2007) and the European Union (5.4 billion in 2007). USD 1.5 billion of China’s 2009 total, she estimates, comprises concessionary loans, and USD 375 comprises debt cancellation. The remaining USD 600 million is divided between grants for goodwill construction projects (hospitals, football stadia, government buildings—including, in the past, presidential palaces), scholarships for Africans to study or attend training courses in China, and technical assistance from Chinese professionals—who come far cheaper than the Western variety—in several fields: most prominently, at present, medical teams attached to hospitals.

Loads of goods

These aid sums are dwarfed by trade flows, with USD 50 billion worth of Chinese exports reaching Africa in 2008. Is this ‘Asian tsunami’ of cheap imports, Brautigan asks, combined with competition from Chinese-invested factories setting up across the continent, destroying prospects for Africa’s own manufacturing sector? The evidence is mixed, she says, but on the whole she appears sanguine. Textiles have certainly suffered—though less as a direct result of Chinese competition than as a consequence of the ending, in 2005, of the international Multi Fibre Agreement, combined with the prominence in African markets of second hand clothing from the West; Chinese-invested textile factories in Africa have themselves been hit hard. But in other sectors there are more promising signs.

Foreign investment in manufacturing can generate ‘spill-over’ of skills and opportunities to local producers. As past cases in point Brautigan cites Japanese investment in automotive parts manufacture in Thailand (now the world’s leader in this field) and Korean investment in garments in Bangladesh. A similar pattern may be emerging, she suggests, in some African countries where clusters of Chinese and local enterprises are now competing in complementary areas such as the leather tanning and footwear industries. She points out that:

The Chinese government wants exports of Chinese machinery and equipment to overtake cheap consumer goods in the export mix . . . it wants mature industries [leather and footwear, early stars of Zhejiang Province’s export dynamism, being prime examples] to move offshore. Setting up factories that process African raw materials in Africa is part of this strategy.” (223, emphasis in original)

Clearly there is an implicit pecking order in this vision: China graduates from the lowest and dirtiest end of manufacturing (tanneries: yuk!) but at least African countries get a foot on an industrialisation ladder that few have yet begun to scale. Cheap imports do not necessarily prevent this, Brautigam tells us, but can actually encourage low-end import substitution when entrepreneurs who have been importing goods see opportunities to invest in making them instead. By way of example she offers a snapshot of Nnewi, in Nigeria, where car parts factories have been established by local dealers who originally traded generic spares made in Taiwan, but realized how easy and profitable it would be to copy and compete with them. Similiarly:

In Nigeria, Chinese and Nigerian manufacturers are competing effectively against Chinese imports in the plastics industry. A host of Ethiopian shoe producers improved their skills and technology after weathering competition from Chinese imports. Kenyan firms have handled the competition well, even in the garment industry. (231)

As evidence that clustered foreign investment in manufacturing can catalyse local investment, Brautigam cites the export processing zones established in the 1970s by go-ahead Mauritius (which was consciously imitating Asia in this, and which now boasts a higher GDP per capita than China.) In the early years, 90 per cent of investment in the Mauritius zones came from Hong Kong and Taiwan; by the late 1990s, 60 per cent of invested capital was Mauritian. This may be a foretaste of what will result from the ‘economic zones’ that China is now promoting in Mauritius (again), Ethiopia, Nigeria, Algeria, Ethiopia and Zambia.

Despite occasional, titillating references to these zones, we learn little of them here. Too soon to pronounce, no doubt. And no doubt Brautigam’s international research team—no less than sixteeen research assistants are acknowledged as contributing to her book—is watching developments closely for a sequel in a couple of years time.

Hoe to hybrid

Her team also needs to take a closer look at agriculture. The two chapters on this are sketchy, offering only the basics: earlier Chinese aid established a number of demonstration projects (notably, irrigated rice stations), showing the obvious potential for improving on low-tech, rain-fed farming; fourteen Chinese agro-tech centres now being set up in Africa are expected to become commercially viable enterprises within three years; some of these are now distributing hybrid rice seeds; this speaks to China’s ambitions in biotechnology, an area where China has growing scientific credibility and senses an opportunity to rise fast up the value chain. (Ditto pharmaceuticals.) Added to this is Brautigam’s rather bald assertion that “Chinese planners see overseas farms as a way to relocate displaced Chinese peasants and provide long-term offshore “insurance” for China’s own food security.” (234) That sounds sinister and I would like to see evidence of its truth. It smacks a bit of the more familiar claim that ‘Chinese planners’ want Sichuanese farmers to over-run the Tibet Plateau. My own observation (on both continents) suggests that it is not farmers but incoming shopkeepers, middlemen and artisans that the locals need to worry about. Sichuanese don’t all want to be peasants, especially in distant and difficult places.

Compared to investment in extractive, manufacturing, construction and service industries, agriculture in Africa presents a political, social and economic minefield. The fragility of many environments, now aggravated by local and more generalised climate change; local and regional competition for soil and water resources; the extraordinary complexities of land tenure systems; the dearth of alternative livelihoods for settled cultivators and pastoralists; their dependence on small-scale production and the need of the political class to accommodate this constituency; the shaky record of larger-scale commercial farming, including the failures of state farms and numerous aid projects, the highly charged issues around white settler farming and more recent expropriation by new elites . . . this is a volatile mix at a time when global food security—threatened, some say, by the new biofuel industry—is on many minds, and when China is by no means alone in exploring investments in African fields. It is not clear, in this context, what form ‘win-win’ could take. China has a lot of research to do, and so do China-watchers. (On the question, by the way, of whether Chinese peasants are flooding into Africa, and if so how many, we learn very little here except that it’s not clear.)

The multi-polar thing

It is abundantly clear, though, that ‘the real story of China in Africa’ is a wider, Asian story. China’s sheer size marks it out (although not from India) and China does hold a special, and especially lurid, place in Western imaginations: perhaps, most recently, because its government proved so extraordinarily skilful in achieving technology transfer and development on its own terms—stimulating and yet deftly managing both foreign aid and foreign investment, making these work in pursuit of its own aims—despite so many Western predictions that it would fall flat on its face in the process. But this was a distinctly Asian learning curve, with those Tiger-Dragon miracle-workers watching, copying and investing in each other, despite some prickly regional relationships. And it is not just China but India, Japan, Korea, Malaysia that have seen in Africa a globalization opportunity, not just a basket case.

Whether this is really ‘win-win’ or not will depend in large part on the ability of African governments to manage investment flows wisely. There is at least some prospect of this happening, with growth now holding up across much of the continent despite the West’s self-inflicted economic wounds. Leastwise, Africa’s (expanding) political and business classes have a more diverse range of possibilities than ever before—although the benefits on the African side are unlikely, in the short term, to be distributed at all evenly. (They were hardly distributed evenly in the West’s industrial revolutions, and Asian industrialization has on the whole been less unequal.)

As to outsiders, there is inherent tension between the West’s ‘good governance’ strictures and Asia’s—not just Beijing’s—strictly business approach. The worst outcome would by a renewed round of not merely commercial but ideological and geopolitical competition in Africa (compounding and complicating the existing overflows of the West’s War on Terror). The common sense of Brautigam’s book, and its willingness to rise above the reflex, xenophobic responses of perceived imperial sunset, gives some grounds for hope that this will not happen.

May 24, 2010
Kampala